World economy: 13 for 2013

By

By

COMMENTS

Share

COMMENTS

Related Content

It feels like a long time since we had a boring year in the world economy. Financial crises, debt crises, food crises, natural disasters, geo-economic power shifts, social upheaval and revolution have all shaped and reshaped the economic environment in recent years.

So will 2013 change the trend and give us a restful year? Or even just one where the downside risks are matched by some nice upside ones? Since Steve Grenville has recently reminded us of economists' failure to forecast, I'm going to do the cowardly but sensible thing and avoid making any predictions. Instead, I've put together thirteen suggestions (in no particular order) of things to look out for in the global economy this year. Here are the first four:

After spending much of the past couple of years wondering whether the eurozone was doomed, financial markets have turned much more sanguine. Indeed, what was once thought to be a near-extinct species – euro bulls – are now again being found in the wild.

By effectively announcing that the ECB was finally ready to take on the role of lender of last resort, the OMT was supposed to reduce the tail risk of a euro collapse. And despite the fact that the ECB has yet to buy its first bond under the program, markets seem convinced, as sovereign yields on eurozone periphery debt have fallen sharply.

Still, while the ECB has bought the eurozone project some much needed time, the fact remains that the eurozone gamble on the sustainability of a monetary union in the absence of a fiscal and banking union is a failed bet. That means that those fiscal and banking institutions will still need to be delivered if the show is to stay on the road, and while there has been some modest progress, there is still an awful long way to go, not least given the lack of political appetite. On that note, elections in Italy and Germany will be worth watching.

What happens if you have a massive asset bubble that then bursts? What does a lost decade look like? What happens when policy rates get driven to the zero bound? Does a massive expansion in the monetary base have to lead to inflation? What are the consequences for growth of a rapidly ageing population? And just how big a public debt-to-GDP ratio can a developed country manage if it has its own monetary policy?